Sunday, July 12, 2009

CIT Red Flags

The company is heading for bankruptcy or debt restrcture.
One thing stands out in terms of its financial condition is its leverage. By the end of Q1 2009, CIT group Inc's total debt was $68 bil while equity was $7.5 bil. The company funds its operations primarily through long term debts. By the end of Q1 2009, $59.5 bil out of $68 bil was long term borrowing. Its interest income shrank to nearly 1 bil to 640 mil while interest payment decreased from 765 mil to 633 mil. The earning power from the rest was limited in helping paying off interests. Net income before tax from the rest non-interest earning business could only contributed to $220 mil in Q3. The credit provision further deteriorated the company's capability to cushion against intereset payment. It provisioned $535 mil in Q1 2009, increasing from 247 mil in Q1 2008.
The pressing issue is that the company has to pay back $1 bil debt principal in August, $1.4 bil by the end of year and another $8 bil by 2010. But the company has been downgraded in June to junk status. Its long term 10 year bonds are trading at 16%. Its stock traded at 1.15 by 07/11/2009, the historic low. Given no clear sign of economic recovery in the near term and the company's deteriorating financial condtions, its equity and bond financing power might be puny and expensive. The implcation is that the company could only raise money from public market, from government. It has borrowed $2.3 bil tarp money. FDIC has said on July 10th to withhold CIT debt garantuee due to its risk. This would be a devastating blow to the company. The hawk stance would take a toll on the company.
It seems that the only solution is either bankruptcy or asking debt holders for concession. Government are unwilling to broker a debt concession deal since the company's failure might not pose systematic risk to the financial markets. It will become clear next week that the bankruptcy might be only option.